Sunday, December 27, 2009

Short-Term Treasury Bills Lacking Interest Among Foreigners

if 13-week bill auction is any indication.

The U.S. Treasury Department will auction away the last big batch of Treasury bills and notes in the final week of this year. The total amount will probably exceed $200 billion (4-week bill amount yet to be announced), of which $118 billion will be Treasury notes of various durations.

I was making a mental note as I went through the recent auction results, and something felt disturbing (from Treasury Department's point of view, I suppose). So I checked the numbers. And here's the chart of 13-week bill auctions since October, plotting the Indirect Bidder (foreign buyers) Percentage and Bid to Cover Ratio.

13-week bill is a run-of-the-mill Treasury bill. The Treasury Department auctions this bill every single week along with 26-week bill and 4-week bill, to the tune of $30 billion in each auction. No one pays particular attention to the auction results of these short-duration bills. They are continuously rolled over to fund the operation of the federal government.

What I noticed was a rather steep, consecutive decline of the Indirect Bidder Percentage in 13-week bill auctions. Bid to Cover Ratio has also started to decline. Now, both Indirect Bidder Percentage and Bid to Cover Ratio sit below their respective 2-plus month support (dotted lines).

Foreign buyers of Treasuries have shifted to the shorter end, or so we have been told. They now seem to be also deserting the short maturity bills. Treasury Secretary Timmy Geithner has announced the Treasury's intention to increase the average maturity of all Treasuries from the current 49 months to 72 months. That means 7-year note, 10-year note, and 30-year bond issues will be significantly increased. The prices will be pressured. Will foreign buyers increase buying the longer-dated notes and bonds for better yields? Or, seeing that there may be no end in sight for the U.S. deficit spending, will they further decrease the long-term Treasuries holdings?

In the worst case, there will be few foreign buyers to be found for both short-term and long-term Treasuries. The vice chairman of the Chinese central bank has recently said, in no uncertain terms, that the world does not have money to continue to buy the U.S. debt.

Who is going to absorb the avalanche of long-term Treasuries, by the way? This immediately comes to my mind. I hope I'm wrong, but I have this sinking feeling that my hope is ill-founded.


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